Courts Take Hands-Off Approach to Arbitration Clauses

Courts Take Hands-Off Approach to Arbitration Clauses

Posted By
Mahir Nisar Attorney at Law

Many business contracts have a clause requiring arbitration of disputes.
Arbitration is an alternative to traditional litigation. One or more arbitrators
conduct a private judicial proceeding and issue an award in favor of one
of the parties. Arbitration awards are legally binding on the parties
and may be enforced in court. But the role of courts in arbitration cases
are necessarily limited, as demonstrated by a recent decision involving
a breach-of-contract arbitration between two large companies.

Citigroup, Inc. v. Abu Dhabi Investment Authority

Abu Dhabi Investment Group had a multi-billion dollar investment agreement
with Citigroup, Inc. The agreement contained an arbitration clause. This
required arbitration of “any dispute” arising from the agreement.

In 2013, Abu Dhabi sought a second arbitration against Citigroup, again
claiming breach of contract. Citigroup then asked the federal court that
confirmed the first arbitration award to issue an injunction against the
second arbitration. Citigroup argued Abu Dhabi was simply trying to re-litigate
its previously rejected arbitration claims. And since the first arbitration
decision was backed by the court, the judge had the authority to “protect
the integrity” of its judgment.

The district court agreed and issued the injunction. The judge cited its
authority under a federal law known as the
All Writs Act, which allows any federal court to “issue all writs necessary or
appropriate in aid of their respective jurisdictions and agreeable to
the usages and principles of law.” This basically means a court
can issue any order necessary to enforce a previous order.

But in this case, the district court abused this authority. The U.S. Second
Circuit Court of Appeals in New York reversed the trial judge's injunction.
The All Writs Act did not apply here, the appeals court said, because
it is up to the arbitrators, not the federal courts, to deal with Citigroup's
objections.

The district court's prior judgment, the appeals court said, merely
“confirmed the arbitration award.” The court did not review
the reasons for the arbitrators' decisions or conduct an independent
judicial inquiry into the underlying dispute between Citigroup and Abu
Dhabi. That means the district court is not a position to determine whether
the second arbitration petition raises issues already decided during the
first arbitration. Federal law prefers arbitration as a means of settling
breach of contract disputes. Therefore, the Second Circuit said, the courts
should make every effort not to usurp the proper role of a contractually
mandated arbitrator.

Need Arbitration Advice?

Arbitration and other forms of alternative dispute resolution can help
parties avoid more lengthy and expensive litigation. But avoiding litigation
does not mean acting without competent legal advice. If you are negotiating
a contract with an arbitration clause—or need to enforce such a
clause in an existing contract—and you need advice from an experienced
New York business attorney,
contact our office today.